Question

John's 8−year−old Chevrolet Trail Blazer requires repairs estimated at $11,000 to make it road worthy again. His​ wife, Sherry, suggested that he should buy a 5−year−old used Jeep Grand Cherokee instead for $11,000 cash. Sherry estimated the following costs for the two​ cars:

	Trail Blazer	Grand Cherokee
Acquisition cost	$27,000	$11,000
Repairs	$11,000	-
Annual operating costs
​ (Gas, maintenance,​ insurance)	$2,580	$2,000

The cost NOT relevant for this decision is the​ ________.

A.repairs to the Trail Blazer

B.acquisition cost of the Grand Cherokee

C.annual operating costs of the Grand Cherokee

D.acquisition cost of the Trail Blazer

Answer 1

The cost NOT relevant for this decision is the​ acquisition cost of the Trail Blazer.

Correct option is (D)

Acquisition cost of the Trail Blazer is a sunk cost which was incurred in some past time. Sunk cost is not a decision making cost.

All costs which will be incurred in the present time and the future time, are relevant costs for decision making.

Thus, repairs to the Trail Blazer, acquisition cost of the Grand Cherokee and annual operating costs of the Grand Cherokee are relevant costs.

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubt. Thanks.